Reforms and Larger Impact

In 1972, the Indira Gandhi led government initiated a series of reforms aimed at ensuing that rich feudal land system was done away with. While in states like Kerala and West Bengal, it took off to the fullest extent, its application was widely varied across India.

One of the stories that has been passed on to me by my parents / grandparents was about how at one point of time (time of my Great Grand Father), we had agricultural land. Since my grandfather moved to town, this land was supposedly let out to be cultivated by a local farmer who sent once in a while a part of what he produced.

1972 reforms marked a end to that long distance farming and our family lost the land we supposedly owned. While I have no clue about how deep the impact was (both in terms of loss of Income as well as loss of what we supposedly owned), the future generation (including me) has done well for themselves. But the story I doubt will ever die.

The demonetization of the currency note by the Modi government is one such grand move that people will talk about for generations to come. While the target for the move was purely to eliminate black money / fake currency, the impact is on a much more broader level hitting commoners as much as the big guys.

If you have recently transacted in real estate, you know that there is no such thing as full payment by way of Cheque / Demand Draft. Depending on how far away the government rates are, it could easily be anywhere between 40% of the amount in Cash to eve 70% of the amount being paid in cash. The payment done in cheque is often showed as the transacted price.

The reason for both the parties being willing to undertake such transaction is to avoid the high incidence of tax. For the buyer, he saves on paying stamp duty while the seller saves on the long term (or short term) gains he needs to disclose and pay tax upon.

Now real estate is not the playing field of only the rich. Everyone seeks out the comfort of having his own house / land which provides him both a way to park his savings as well as a emotional attachment of having achieved something in life.

Sellers on the other hand have their own reasons to sell. For some, its to invest in another upcoming project, or for paying off expenses / debt incurred (in rural areas, marriage is one key reason for sales) or any one of the other myriad reasons. Very few sell and stuff the money in Bank lockers so as to speak.

Theoretical distribution would suggest that a large part of the money that goes through such transactions go back into the economy. In other words, when people talk about how maybe 33% of the big denomination notes will never come back to the system and hence get extinguished, majority of it would not be notes that were kept in lockers but something that used to go around.

I would not like to talk about the morality and if the guys deserve their fate, but lets focus our energies on the impact it could cause on the economy. Since the demonetization move, there has no lesser than a few thousand articles detailing either the positive part of the negative.

When cash is low, the first causality is spending. We try to limit our spending to things we really require rather than going out to buy things that can wait for a while. As I write this, I am also following the tweets of https://twitter.com/acorn as he goes around Bangalore trying to judge its impact on the lives of common man / small businesses.

My view is that there will be some kind of cascading impact due to the demonetization. With outflow being seen in emerging markets as a whole (after the Trump Win), this is creating a kind of a spiral in the domestic stock markets which has gone down a bit but its interesting to see that the fall is also being seen in supposedly defensive counters and one where its not too pricey.

Going into the US Elections, Indian markets were not cheap. While this fall has made a few sectors seem cheap, we shall really know whether it was really cheap or not only after the next quarter results are out.

Bear rallies end in two ways. One, we keep weakening for a while, make some sort of bottoming formation and then rise for there. Recent rise from Feb lows was a textbook example of this. A second and more ferocious way is when markets go and hit the lower circuit. Big moves generally portent end of a bear rally unless the market sees them happening at way too higher level (like in 2008 when the first freeze happened at the start of the bear run).

Despite the fall, I have not seen any change in my allocation matrix which leads me to believe that a larger fall maybe on the horizon unless earnings suddenly start catching up (or interest rates take a dive). Nibbling in falls is good as long you have enough to nibble if markets really take a crack. Else, stick with what you have and wait for the dark clouds before risking more of your money in the hope of a bounce back to reality (our assumed reality that is).

Do remember, India growth story was more of internal demand than we replicating China and exporting to the world. If local demand dies, what would be the impact is the million dollar question.